Gold Thoughts

Perhaps we should establish an official day of mourning for the loss of independent
thinking now so widespread among today's journalists. In the U.S., independent
journalism has died. Most of the reporting media has now become the official
apparatchik of the Obama Regime. With one national network moving into the
White House for daily supervision, all pretense of independence has been lost.
We can probably, given access to the internet, learn to survive the death of
journalism as a profession. However, our wealth may not survive the loss of
an independent central bank. Since Federal Reserve actions are somewhat greater
than a butterfly in Africa flapping its wings, the rest of the world may need
to worry about yet to come financial chaos.

To explore the loss of independence at the Federal Reserve, let us consider
the first chart above. In it can be found a blue line that uses the left axis.
That line represents the cumulative monetization of U.S. government debt by
the Federal Reserve since the beginning of the time period included in the
graph. For most of that chart, the Federal Reserve monetized very little U.S.
government debt. Then, in January of 2009 it began to monetize debt at an explosive
rate. Did something change at that time?

Since then, the Federal Reserve has monetized on the order of $700 billion.
Now while percentages are more important than absolute numbers, that value
is more than the combined GDP of Poland and Ireland. It is about 2/3 the size
of the Canadian economy. The change that arrived in January was that the Federal
Reserve was to create more money in a shorter period of time than has ever
been done in history. Certainly one change that arrived in January was the
total loss of independence at the Federal Reserve.

That blue line has some important meaning for Gold investors. With the Obama
Regime likely to run deficits of $2-3 trillion for the next few years, that
blue line will continue to rise. The Federal Reserve is now the "printing press" for
an out of control Peronist-like government. That blue path of debt monetization
puts a long term floor under the price of $Gold. If ever an argument
existed for long term ownership of $Gold, it now certainly exists with the
end of independence at the Federal Reserve.

The red bars, using the right axis, also have meaning for investors. They
represent the amount of U.S. debt monetization being done by the Federal Reserve
on a trailing 9-week basis. Think of these red bars as representing the liquidity
pedal, as in a gas pedal, for the U.S. financial system. When those bars are
rising, the gas pedal is being pushed to the floor. The monetary carburetor
is flooding the financial engine with liquidity. That burst of liquidity pushed
financial markets higher. That flood of liquidity is what sent the stock and
Gold markets higher, providing hope and optimism for all.

With those red bars now starting to fall, for whatever reason, the consequences
are like taking one's food of the gas pedal. The monetary carburetor is not
sending as much liquidity into the financial system. The engine, or financial
markets, then starts to slow. Such is what has been happening to both the stock
and Gold markets. They are sputtering on a lower level of liquidity injection.

Last Summer in addition to the normal seasonal liquidity decline banks and
hedge funds moved toward near collapse. As all that happened together, a massive
draining of liquidity occurred. That development sent the markets for stocks
and precious metals lower. A similar, though not as severe, situation seems
to be unfolding this Summer. As the chart above shows, three buy signals built
on over sold conditions were required last Summer for $Gold to find its final
bottom.

Thus far, one intermediate buy signal has developed. As these over sold conditions
develop this Summer, as a consequence of the loss of liquidity, investors should
be adding to their Gold holdings. While this Summer's low should not be as
deep as that of last year, it should have true importance for investors. A
longer term perspective, both historical and future, suggests that $Gold will
make $1,000 the new floor this coming Fall. The agony of Summer may be the
last chance for investors to buy $Gold for less than $1,000.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS
as part of a joyous mission to save investors from the financial abyss of paper
assets. He is publisher of The Value View Gold Report, monthly, and Trading
Thoughts, weekly. To receive these reports, go to http://home.att.net/~nwschmidt/Order_Gold_GETVVGR.html.

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and
author of "$1,265 GOLD", published in 2003. A weekly message, TRADING
THOUGHTS, is also available to electronic subscribers. You can obtain
a copy of the last issue of THE VALUE VIEW GOLD REPORT at The
Value View Gold Report. Ned welcomes your comments and questions, and
tries to answer most all. His mission in life is to rescue investors from
the abyss of financial assets and the coming collapse of the U.S. dollar.
He can be contacted at ned@valueviewgoldreport.com